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Here’s why I couldn’t resist the Persimmon share price

Stock MarketsNov 29, 2018 15:45
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As I’ve been getting older and shifting my investment strategy more and more towards seeking sustainable dividends, at regular intervals I’m faced with what is actually a happy problem — what should I do with the dividend cash that I’m accumulating?

I aired my indecision last month, when Persimmon (LSE: LON:PSN) and Character Group were on my list of tempting options for my SIPP. In the end I went for Persimmon, partly because it’s a company I think I know better, but mainly because I continue to see our big housebuilders as oversold cash cows right now.

As an aside, I also have a small holding in Sirius Minerals, which I also bought out of accumulated dividend cash. As a higher-risk growth stock it’s way outside my usual strategy these days, but I somehow feel happier taking risks with dividend cash almost as if it’s free money. That’s irrational and every pound we possess has exactly the same value, but I mention it here only as a reminder that we need to keep ourselves aware of our own foibles.

Anyway, why did I go for Persimmon?

Demand I’ve mentioned before that I think there’s a misconception that housebuilders need rising house prices to make money and that they’ll be in trouble should prices fall. But that is simply not true. What’s needed is a selling price that’s higher than the cost of construction (which includes the price of the land, which will fall when house prices fall), coupled with sufficient demand for houses.

That demand very much seems to be there. In its Q3 update delivered earlier this month, the company revealed a 3% rise in private sales since interim results were released in August, and that’s compared to what it called “strong comparatives” from a year previously.

Persimmon is fully sold up for the current year, and had approximately “£987 million of forward sales reserved beyond 2018, an increase of 9% on the same point last year.” As for any feared weakening in house prices, the firm told us that prices “remain firm across our regional markets.”

“Resilient consumer confidence … continued mortgage lender support … positive market conditions … mortgage approvals ticking up.” If those are signs of an impending collapse in the housing market, well, I’m not seeing it.

Cash The main thing I want to see in my investment candidates is cash, and lots of it. Persimmon reported net free cash generation of £240.4m in the first half. That was a little down on the same period a year previously, but it means the company has so much surplus cash that it’s handing back big chunks of it to shareholders.

Including these special extra returns, we’re set to receive at least 235p per share for 2018-19 and 2019-20, with payments reverting to 110p by 2021. Even that 110p represents a yield of 5.5%, and between now and then we’ll get nearly 12% on today’s price.

I fully expect Persimmon’s share price to remain volatile over the next 12 months, but I’m happy that I’ve secured a nice stream of dividends at a bargain price. And, I must add, I’d think pretty much the same about any of our top housebuilders.

Alan Oscroft owns shares of Persimmon and Sirius Minerals. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here’s why I couldn’t resist the Persimmon share price
 

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